DON'T LAUGH AT LAFFER

BACKGROUND

Art Laffer is a well-known economist. His primary impact in the history of the United States of America has been on tax policy. He is best known as the architect of Ronald Reagan’s tax cuts of the early 1980’s and the ensuing economic explosion of the mid-1980’s.

Arthur Betz Laffer was born on August 14, 1940 in Youngstown, Ohio. Laffer achieved academic honors by winning a BA Degree in Economics from Yale University in 1962 followed on by a MBA in 1965 from Stanford University. He capped off his sojourn in academia with a PHD in Economics from Stanford in 1971.

Laffer has a long list of professional accomplishments. He had founded his own company and is CEO of Laffer and Associates in Nashville, Tennessee. He has given financial advice to many successful government officials over his career in particular on government taxation as related to prosperity within their nations.

LAFFER CURVE

Art Laffer is the first to admit that the so-called “Laffer Curve” was not his original idea. It was a combination of thought he learned from Ibn Khuldun, and John Maynard Keynes. The basic concept was based on the fact that if tax rates were 0% or 100% then government revenues would under both circumstances be zero, and that somewhere in between an ultimate tax rate could be found to both optimize economic activity and government revenues. Laffer differentiates between the arithmetic effect and the economic effect. The trick to optimization was twofold both taxation level and timing. No one has been more adept at exercising these concepts than Laffer. When Art Laffer talks taxation you ignore his advice at your own peril.

The use of The Laffer Curve is the art of interpretation in finding the correct value of the variable “t” (tax rate) on the curve. No one else in history has displayed the artistry in this task as Art Laffer. He made it work for Ronald Reagan and has shown in historical perspective how it worked for presidents Coolidge, and Kennedy.

Dr. Laffer was first reported to have shown this curve in 1974 to then Professor at University of Illinois Jude Wanniski, Donald Rumsfeld (Chief of Staff to President Gerald Ford), and Dick Cheney (Rumsfeld's deputy and former classmate at Yale) at the Two Continents Restaurant at the Washington Hotel in Washington, D.C. Laffer recalls Wanniski’s account,” I supposedly grabbed my napkin and a pen and sketched a curve on the napkin illustrating the trade-off between tax rates and tax revenues.” Wanniski named the trade-off "The Laffer Curve." Later Laffer recounted, “I personally do not remember the details of that evening, but Wanniski's version could well be true. I used the so-called Laffer Curve all the time in my classes and with anyone else who would listen to me to illustrate the trade-off between tax rates and tax revenues. My only question about Wanniski's version of the story is that the restaurant used cloth napkins and my mother had raised me not to desecrate nice things."

LAFFER NOW ADVOCATES FLAT TAX

Art Laffer isn’t resting on his laurels he is now advocating a plan for fair flat taxation to be employed by the Federal Government. I have seen him on numerous occasions with Neil Cavuto, and on CSPAN. Laffer has calculated that all Federal taxes can be replaced with a flat tax on all types of income of 15% plus a 3% value added tax (VAT). This includes payroll tax which alone is now greater that 15% for most working Americans. Aside from exclusions for low income Americans no other exclusions would apply.

This is a revolutionary concept. It would allow for the almost complete elimination of the IRS. Laffer has made estimates that this new tax policy would have such a stimulative effect on the economy that full employment could be attained within three to four years of implementation, and Federal revenues would allow for a balanced budget.

Along with the title, Don’t Laugh At Laffer I would also advise you don’t bet against Laffer. LAFFER KNOWS OF WHAT HE SPEAKS!!!!!!!!!!!!!!!

Comments

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AUTHOR

Tom Whitworth

8 years agofrom Moundsville, WV

gryffon,

I have never heard Art Laffer speak on this precise matter, but from what I heard him espouse I think he would be in favor of it. I believe that's why he wanted a small VAT.

gryffon

8 years ago

What if they put in the bill (should it ever be fortunate enough to become a bill) that all rates are fixed and cannot be raised or lowered? This would mean that the only possible increase in revenue would be through an increase in A. Jobs created B. New businesses started and C. Increase in taxable population. All of which are a benefit to the country and economy.

AUTHOR

Tom Whitworth

9 years agofrom Moundsville, WV

Hxprof,

As I recall Laffer only proposed adding a small VAT as a hedge against inflation. As prices go up revenues from taxes also go up automatically. This mechanism deters rising rates since a rising amount due to VAT is built in.

Hxprof

9 years agofrom Clearwater, Florida

I like the flat tax idea. The idea was considered by congress in the late 80's, but so many lobbied to keep their exemptions that what emerged from the tax system overhaul was similar to what we had in place already.

I take issue with Laffer's support of a VAT. I don't trust VATs at all. They can be too readily expanded by an over-the-top congress (like we have now). I'm not laughing at Laffer-I love the flat tax concept; I just don't like VATs.

AUTHOR

Tom Whitworth

9 years agofrom Moundsville, WV

Jib,

This adminstration can't even control their bowels. They rule with a baseball bat. The future holds hope for a return to sanity.

AUTHOR

Tom Whitworth

9 years agofrom Moundsville, WV

sheila b.

Anything that make sense has no chance during the Obama admistration, but 2012 ain't too far away to keep on hoping.

AUTHOR

Tom Whitworth

9 years agofrom Moundsville, WV

Dan,

You have the correct message. Thank you for youe keen observations and your kind comments.

AUTHOR

Tom Whitworth

9 years agofrom Moundsville, WV

Ralph,

I never voted for George H.W, Bush, I knew he was a Maine liberal at heart. I sat out the 1988 election and I voted for Perot in 1992. Anyone skeptical of Laffer must be going to a convention of Marxist.

jiberish

9 years agofrom florida

The flat tax would not work for this administration, it lacks total control.

sheila b.

9 years ago

Because it makes sense, it probably doesn't have a chance.

Dan Demland

9 years agofrom Phoenix, AZ

A flat tax is the fairest way to levy taxes. Right now the "rich" has loopholes, the "poor" is exempt or limited, and the middle class bears the burden. Not what I call fair.

I have been an advocate for a flat tax for years. No need for an accountant, what ever I earn, I pay a percentage. Best yet, NO IRS AUDITS!!!!

Ralph Deeds

9 years agofrom Birmingham, Michigan

My recollection is that President George H.W. Bush called Laffer's theory "voodoo economics." Conventional economists are skeptical of Laffer.

AUTHOR

Tom Whitworth

9 years agofrom Moundsville, WV

Pop,

Laffer has done the calculations on this taxation plan and Laffer know about the effects of taxation and revenue raised.

breakfastpop

9 years ago

Dear Tom,

Fascinating hub. I agree with this position, a flat tax is the answer instead of all this convoluted complicated formula that nobody really understands. Even the head of the IRS can't do his own taxes!

AUTHOR

Tom Whitworth

9 years agofrom Moundsville, WV

vrajavala,

Sorry I skipped right by your comment. I have seen Laffer quite often on Cavuto. Cavuto knows Laffer is the foremost authority on taxation matters.

AUTHOR

Tom Whitworth

9 years agofrom Moundsville, WV

eovery,

Laffer is THE MAN on matters of taxation and maximization of revenues while minimization of tax rates.

AUTHOR

Tom Whitworth

9 years agofrom Moundsville, WV

Daddy Paul,

Can you imagine the boost to freedom and prosperity if the American people are freed from the burdon of the IRS due to a flat tax. The FICA and Medicare taxes are very regressive and a burdon on the middle class.

I have also heard Laffer lament the behavior of mortgage bankers and the Fed as enabled by Jimmy Carter and the Community Reinvestment Act. Furthered by Barney Frank and Chris Dodd. The videos below are more on point with taxes and The Laffer Curve in particular.

When you consider the non-productive money spent by the rich with tax lawyers and accountants plus the fact that the payroll tax is limited by income, the flat tax would be much fairer. Everyone above the poverty line would pay their fair share.

Also employers wouldn't be burdoned as tax collectors and by their share of FICA taxes.

Even Turbo Tax Timmy and Charlie Rangle might decide to pay their taxes.

Pamela Oglesby

9 years agofrom Sunny Florida

Tom, I have wondered for a while now if a flat tax wouldn't be a good answer to tax collection. Those that don't pay taxes because maybe they are drug dealers would pay on all their purchases. Those that have more, spend more and would be willing to pay the tax. I guess it wouldn't be a simple change but the IRS is sure complicated, messy bureaucracy. Good hub. Something to think about is good.

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